New Penalty Regime for late VAT payments
The new regime starts on 1 January 2023 (for periods beginning on or after this date) . It is much fairer than the current default surcharge system.
One unfortunate sole trader who paid her VAT one week late got a 15% default surcharge of £217,701 because she already had minor misdemeanors on her VAT record.
With the new regime she would only be paying interest on the outstanding amount at 2% for the period - probably under £1,000.
If a business pays its VAT late, it will be charged interest from day one. The interest rate will be 2.5% above the Bank of England’s base rate. Interest is not a penalty; it is commercial restitution to compensate HMRC for late payments.
There will be no penalty charged if VAT has been paid by the end of day 15 after the due payment date. So, for example, tax declared on the March 2023 return is payable by 7 May; therefore payment needs to be made by close of play on 22 May to avoid a 2% penalty.
If any tax is still owed by close of play on day 30 – 6 June 2023 in this example – a further 2% penalty will be charged on this outstanding balance.
From day 31, an annualised penalty rate of 4% will apply until the outstanding tax is paid; e.g. an extra 1% penalty for payments made three months and 30 days late.
A penalty is only charged on tax owed on the penalty trigger dates, so there is an incentive to make part payments.
The new system will apply for periods beginning on or after 1 January 2023, so make sure you pay your January and February 2023 returns on time because the old regime will still apply.
If a time-to-pay arrangement is agreed with HMRC, the penalty clock stops ticking. But late payment interest will still be charged on the basis of commercial restitution.
As a first-year concession until 31 December 2023, a penalty will not be issued by HMRC if all tax owed on a return is fully paid within 30 days of the due payment date. Note the word ‘all’ to get this concession.
How to reduce or avoid a late payment penalty
Submit returns on time: Make sure that you provide the information for us to submit your returns on time, even if you cannot pay the tax owed by the due date.
Direct debit: Set up the system to pay your VAT returns by direct debit, so that HMRC will automatically collect the payment three working days after the due date.
Time-to-pay agreements: Ring HMRC as soon as you can to arrange a time-to-pay agreement. No penalty will be applied once a time-to-pay agreement has been accepted by HMRC. So, for example, if an agreement is reached on day 20 after the due payment date, this will avoid a penalty being charged in the first year due to HMRC’s temporary 30 day concession (see above). However, interest will still be charged from the due payment date.
Make part-payments: Penalties are charged according to tax owed at the end of days 15 and 30. This gives a clear incentive to pay as much tax on time as possible, and part-payments thereafter to reduce the scope for HMRC to issue late penalty notices and charge interest.